The impact of COVID-19 has raised questions and concerns for both Landlords and Tenants in relation to commercial leases as some sectors have been forced to close and a strain has ensued.
Both Landlords and Tenants will be anxious over the sustainability of Tenants’ businesses. Dealing with rental liabilities and funding the provision of services are of concern for both parties. In the current COVID-19 pandemic, the obligations in leases may now appear to both sides as obstacles to be negotiated and resolved, rather than matters for enforcement. Some Landlords may be subject to superior lease or banking covenants which require them to enforce occupational Tenant’s obligations, but it is equally unlikely that those covenants will be insisted upon.
Initially, it is recommended that individual leases are checked as they are all different. The following guidance is based upon a general review of a ‘typical’ lease and it is recommended that you seek legal advice from a solicitor before taking any action. Any action taken and agreed between the parties ought to be formalised either by a side letter or deed.
1. Closure of premises and contractual obligations
The closures announced on 20 March and 23 March are enforceable by law under the Health Protection (Coronavirus, Business Closures) Regulations 2020, and the more recent closures under the Coronavirus Act 2020. A full list can be found at:
Some leases contain a ‘keep open’ clause, particularly in shopping centres and the question has been raised if a force majeure clause will excuse Landlords and Tenants from performing the obligations contained within their lease due to COVID 19.
Q: What is a force majeure clause?
A: A force majeure clause will provide that in certain specified circumstances (such as a catastrophe or Act of God that are beyond the parties control for example, an earthquake or a human disaster such as wars, terrorism and strikes. the parties can terminate the contract/lease, or perhaps suspend or delay performance of obligations. You would expect to see such a clause within construction contracts for example however, it is rare in modern leases. Licence agreements in relation to serviced offices sometimes contain forcemajeure clauses, and more historic leases may also contain them. Therefore, each lease ought to be reviewed and advised upon accordingly.
Q: What if my lease doesn’t have a force majeure clause?
A: Most leases have a clause that requires that the Tenant complies with statutory obligations and if a business operates in contravention of the Health Protection (Coronavirus, Business Closures) Regulations 2020 it will be committing an offence and could face prohibition notices and fines. Therefore, the general consensus (although not confirmed) appears to be that the statutory requirement covenant would prevail the keep open clause. In other words, if a Tenant has to shut under the new legislation, it is unlikely they would be in breach of their lease.
Q: If I am a Tenant and intend to close my premises (if not already) should I notify my Landlord?
A: Tenants are usually required under the terms of their lease to notify their Landlord if they intend to close their premises and Landlords are under a duty to notify their insurers. If this is not done, then the insurance cover could be jeopardised.
Also, Tenants need to give consideration that incoming post needs to be monitored as legal documents and notices can still be validly served at the premises even if the Tenant is not there. Tenant’s may consider having their post re-directed.
2. Payment of rent and enforcement
The majority of leases only provide for suspension of rent in the event that the premises are damaged or destroyed by an insured risk.
Q: Can a Tenant withhold rent?
A: If a Landlord has closed premises and has stopped providing services, a Tenant may consider withholding rent. Most leases contain a clause stating that the rent and other sums due under the lease are to be paid with no set-off or deduction. This means that the Tenant would need to continue paying the rent and other sums due and therefore, the terms of payment still apply.
Q: Can non-payment of rent be enforced?
A: Non-payment of rent is a default which enables the Landlord to trigger enforcement options. Ordinarily the Landlord might consider forfeiting the lease. However, with regards to tenancies within Part II, Landlord and Tenant Act 1954, that option is not possible as s.82(1), Coronavirus Act 2020 provides protection against forfeiture of leases for commercial Tenants who are in default with payments of rent or other sums due under their leases. The right to forfeit is suspended during the initial period of the Bill’s application up to 30 June 2020, and any extension of it. Interest will continue to accrue on unpaid items during the period.
There has been comment from the British Property Federation that certain Tenants are interpreting this measure as an instruction not to pay rent regardless of their circumstances. Therefore, it is helpful for Landlords to know that s.82(2) of the Act also provides that no conduct by or on behalf of the Landlord during the relevant period is to be regarded as waiving the right to forfeit for non-payment of rent and the right will remain unless it is explicitly waived in writing.
Q: Are there any other remedies?
A: Other remedies available to Landlords affected:
- the Landlord might sue in the County Court and obtain a money Judgment which could potentially be enforced against the Tenant’s property.
- use Commercial Rent Arrears Recovery against any Tenant’s goods at the property. However, the Civil Enforcement Association reports that enforcement of debts is suspended for the time being, and civil enforcement agents are also putting CRAR on hold.
Q: Can a reduced rent or concession be agreed?
A: The following could be considered:-
- A reduction in rent.
- A rent-free period.
- A change from quarterly to monthly payments.
- Deferred rent.
- A reduction in service charge.
- A draw down of funds from an existing rent deposit.
These options may not be well received by Landlords, however, it is an opportunity for negotiation to perhaps agree something in return such as a break option or an increased rent to be deferred until a date when COVID-19’s financial implications may be expected to have abated.
Q: Should the terms of deferment be documented?
A: Any such variations/agreements/negotiations to a lease need to formally documented by way of a side letter or deed and it is recommended that legal advice is taken by both parties.
Q: Can I claim on my business interruption insurance policy?
A: Tenants may well have business interruption cover, but the risks covered tend to be linked to property damage. A leading insurance provider has published a bulletin stating that most insurances will not cover a virus unless expressly mentioned in the policy. Policies may cover the compulsory closure of the property in response to an outbreak of a ‘notifiable disease’ and COVID-19 was registered as such on 5 March 2020.
It is advisable that the specific wording of the insurance policy is carefully checked and contact your insurance provider for further information.
Q: Can I terminate my lease?
A: If there is a break clause within the lease then a termination is possible on the break date, if the specific requirements of the clause are strictly adhered to. If the lease does not contain a break clause then the lease will continue unless forfeited (see point 2 above), frustrated or surrendered by agreement between both parties.
Q: What does frustration of a lease mean?
A: A lease may be terminated by frustration if an event occurs which makes it impossible to perform an obligation, or renders the obligation radically different from what was in the parties’ contemplation at the time the lease was entered into. For example, in the case of National Carriers Ltd v Panalpina Northern Ltd  AC 675 the House of Lords accepted that in principle, the circumstances would need to be exceptional – the obliteration of the site of the property by a volcanic eruption perhaps. The COVID-19 pandemic isn’t perceived to be a frustration event as it does not render the enjoyment of possession of the premises impossible. A temporary closure of premises by government order, even a lengthy one, is also unlikely to be regarded as making a sufficient alteration to the circumstances as to amount to frustration.
If you have any questions regarding COVID-19 and commercial leases or any other commercial property query, please contact:
Karen Piontek | Partner | firstname.lastname@example.org | 01257 448410 | 07919414758